A Message to Carl Icahn:
OCTOBER 17, 2009
Six Charged in Vast Insider-Trading Ring
online.wsj.com
In a case echoing the scandals of the 1980s, federal authorities exposed what they claim is the biggest insider-trading ring in a generation -- a conspiracy in which a hedge-fund kingpin and executives at blue-chip firms including IBM and Intel allegedly connived to profit on Google and other big-name stocks.
At the center was Raj Rajaratnam, founder of Galleon Group, a New York-based fund firm that manages $3.7 billion. A native of Sri Lanka, he spent years carving a reputation as a meticulous investor in technology stocks, building a fortune estimated at $1.5 billion.
Mr. Rajaratnam, 52 years old, was led away from his apartment in New York's Sutton Place neighborhood after a 6 a.m. raid by the Federal Bureau of Investigation.
Hours later, the U.S. Attorney in Manhattan charged him and three others with securities fraud and conspiracy to commit securities fraud, and two others with conspiracy. The Securities and Exchange Commission leveled civil charges of insider trading against all six. Friday night, the judge set $100 million bail for Mr. Rajaratnam and lower bail for the others.
The case casts a spotlight on a financial crime -- insider trading -- with a long history on Wall Street. It is illegal to trade based on corporate information not disseminated to the public. But over the decades, a rogue's gallery of investors has succumbed to that lure.
The crime erupted in an epidemic in the late 1980s, following a surge in takeovers that put armies of bankers and lawyers in possession of market-moving information about merger plans and tactics. At the center was Ivan Boesky, an arbitrageur who cultivated executives and investment bankers, ultimately paying a $100 million penalty for trading on information from a Drexel Burnham Lambert banker. He served 22 months in prison.
Since the 1980s, Wall Street has changed, with hedge funds acquiring power and influence. But the game of gleaning information still relies on cultivating sources in positions to know corporate secrets. Funds employ analysts and investigators to seek an edge in boosting returns and keeping investors on board. Like Mr. Boesky, Mr. Rajaratnam is an outsider who made it big on Wall Street.
The case against him reads like a thriller. An unnamed cooperating witness, described as a onetime Galleon employee, helped spark the investigation, taping conversations with Mr. Rajaratnam. That led to broader wiretaps that capture the bravado of traders looking for an advantage. Prosecutors said the case is the first to use wiretaps for pursuing insider-trading charges.
The others taken into custody and charged were:
Robert Moffat, 53, an executive at International Business Machines Corp. in charge of its supply chain, who recently was also given responsibility for its hardware, server and its semiconductor business -- and has been considered a potential future candidate for CEO.
Rajiv Goel, 51, an executive in the treasury department of Intel Corp., who graduated from the University of Pennsylvania's Wharton School in 1983, the same year as Mr. Rajaratnam.
Anil Kumar, 51, a director at management-consulting firm McKinsey & Co., whom the SEC described as a friend of Rajaratnam and investor in Galleon funds.
Mark Kurland, 60, of New Castle Partners LLC, a stock-trading hedge-fund group started in 1995 at Bear Stearns Asset Management Inc.
Danielle Chiesi, 43, a portfolio manager at New Castle.
The complaints allege the group earned $20 million in improper gains. Messrs. Kurland and Moffat were charged with conspiracy but not with fraud.
Mr. Rajaratnam has recorded average annual returns of 21% for Galleon's biggest fund, soundly beating the S&P-500 index, according to marketing documents. Galleon once oversaw more than $7 billion but shrank last year and faced withdrawals at year end, said a person familiar with it.
Of particular value to funds are insights of executives working directly in an industry, who might provide gossip or "market color." There is nothing inherently wrong with such conversations, but when information is passed that may affect a stock price, traders and executives expose themselves to potential insider-trading allegations.
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